Negative interest rates and what it means

March 24th, 2016 at 3:45:21 PM permalink
AZDuffman
Member since: Oct 24, 2012
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Quote: Pacomartin

What a world we live in! How did we get to this position?


It is complicated, but a few things stand out.

At one time, the idea of a central bank was liquidity and price stability. As much as I would like it, a gold system will not work. Population increases alone mean we need a growing money supply. Without liquidity, we would have "panics" every few years like in the 1800s. At first, it worked. But things change.

Eventually, the mandate of the central banks grew to include stable employment. Then the governments of the world got hooked on spending, so a managed-inflation became the norm. Then business cycles got extended, making recessions less frequent but much sharper.

You have the Japan-syndrome of sick banks and companies propped up to avoid more collapse. Zombies they call them. If allowed to fail something better may replace them. Instead they suck resources from everything else.

I still am not sure where it all ends up. We may have to get a collapse of the old systems. Negative rates cannot last. Next thing is to just print money and have low to zero taxes so an inflation is triggered and old debt is "grown out of."

You will be better owning real property than renting.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
March 24th, 2016 at 4:02:04 PM permalink
Evenbob
Member since: Oct 24, 2012
Threads: 121
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Quote: AZDuffman

You will be better owning real property than renting.


Older people are making a mistake
going for a reverse mortgage. They
should be leaving their property to
their kids, it's the only way some of
them will ever own a house.
If you take a risk, you may lose. If you never take a risk, you will always lose.
March 24th, 2016 at 4:02:10 PM permalink
Wizard
Administrator
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Quote: AZDuffman
Next thing is to just print money and have low to zero taxes so an inflation is triggered and old debt is "grown out of."


If I were in charge, one of my highest priorities would be to eliminate the income tax. I especially feel this way now as I'm doing my 2015 taxes.

To go to my point, I see that the ratio of taxes to GDP in the United States is 26.9%. Let's just say for the sake of argument that I want to collect 30% of GDP, because I don't like debt. What do you think of the idea of a 20% consumption tax and just printing the other 10% every year? I think we could all live with 10% inflation. I'm sure anybody could nit pick the idea, but I could write all day about the the inefficiency, waste, and unfairness in the current income tax code.
Knowledge is Good -- Emil Faber
March 24th, 2016 at 5:04:17 PM permalink
AZDuffman
Member since: Oct 24, 2012
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Quote: Wizard

To go to my point, I see that the ratio of taxes to GDP in the United States is 26.9%. Let's just say for the sake of argument that I want to collect 30% of GDP, because I don't like debt. What do you think of the idea of a 20% consumption tax and just printing the other 10% every year? I think we could all live with 10% inflation. I'm sure anybody could nit pick the idea, but I could write all day about the the inefficiency, waste, and unfairness in the current income tax code.


I do not like that idea at all. The problem is that there is no free lunch. A government cannot just say, "here is some wealth for everyone!" The inflation rate would not be 10%. It might eventually be hundreds of percent. The USA would lose the ability to trade on the world stage and all value in our currency would collapse. People inside the USA might even stop taking dollars in payments.

While I would join you in a call to constitutionally prohibit income taxes and get to excise taxes, printing money like that will not work.

BTW: I remember 10% inflation. No thanks. We had that in the 1970s.

The man who damns money has obtained it dishonorably; the man who respects it has earned it
April 7th, 2016 at 9:49:54 PM permalink
Pacomartin
Member since: Oct 24, 2012
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Quote: Tucking 10,000-Yen Bills Under the Mattress Spells Worry for Abe

Japanese turn to cash on fears of tax and negative interest rates.
Toru Fujioka February 23, 2016

Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases.
While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts -- where it can make its way back into the financial system and be put to productive use.
That’s a big problem for Prime Minister Shinzo Abe and his central bank chief, Haruhiko Kuroda, as they try to spur consumption and reflate the stuttering economy.
The mountain of cash in Japan amounts to almost 100 trillion yen ($890 billion), equivalent to about a fifth of the size of the economy. And last year the number of 10,000-yen notes, the biggest bill, increased by 6.2 percent, the largest jump since 2002.

http://www.bloomberg.com/news/articles/2016-02-24/tucking-10-000-yen-bills-under-the-mattress-spells-worry-for-abe



Japan already has one of the largest supplies of currency, and a shockingly large number of 10,000 Yen banknotes in circulation (over 75 notes per person). And they want more. Safe maker Eiko Co. says shipments of its products have doubled since autumn last year

What should the government do? If they refuse to print the notes the Japanese will probably collect the currency of another nation.

GDP% 2014 Currency
20.07% Japan
15.67% Hong Kong SAR
12.39% Russia
11.55% India
10.99% Switzerland
10.33% Euro area
8.82% Singapore
7.74% United States
6.46% Saudi Arabia
6.19% Mexico
5.04% Korea
4.96% Turkey
4.41% Australia
4.01% Brazil
3.80% Canada
3.62% United Kingdom
3.56% South Africa
2.12% Sweden


I am convinced that Sweden is trying for some level like 1%.
April 8th, 2016 at 4:08:19 AM permalink
AZDuffman
Member since: Oct 24, 2012
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Quote: Pacomartin

Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases.
While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts -- where it can make its way back into the financial system and be put to productive use.
That’s a big problem for Prime Minister Shinzo Abe and his central bank chief, Haruhiko Kuroda, as they try to spur consumption and reflate the stuttering economy.
The mountain of cash in Japan amounts to almost 100 trillion yen ($890 billion), equivalent to about a fifth of the size of the economy. And last year the number of 10,000-yen notes, the biggest bill, increased by 6.2 percent, the largest jump since 2002.


I saw this but forgot to post it here. Work has the site blocked!

Remember that this note is like the USA $100 or so, thus not the most huge thing. Japan is also still way more cash driven than most western nations. But that being said, here is an early example of what to start expecting. Japan is 25+ years into deflation. Anyone under age 40 there knows hardly anything but, which might mean it gets worse and worse as behavior is set for life.

Will a government allow a shortage of bills for cash withdraw? Imagine going to your bank and being told "sorry" to wanting a few grand. Then the government insists the banks are fine because the money is there, just not the cash! What happens to confidence?
The man who damns money has obtained it dishonorably; the man who respects it has earned it
April 8th, 2016 at 12:30:13 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 851
Posts: 10166
Quote: AZDuffman
What happens to confidence?

¥10,000=$92

While the number of $100 bills is between the number of $20 bills and the number of $1 bills in USA, in Japan the ¥10,000 is not only the largest denomination, but the largest stock of banknotes in circulation, not just in value, but also in absolute numbers. It is essentially a crucial engine of the economy.

Logically, Japan seems far more in need of a ¥50,000 banknote than USA seems in need of a $500 banknote. But with the central bank having a 0% interest rate, the Japanese government is not likely to make it easier to keep large amounts of savings in cash.

Katsumasa Suzuk, a Japanese lawmaker brought up the soaring safe sales in parliament on Monday. "It suggests a vague sense of unease among the public."

A funny quote and more accurate observation fromTyler Durden :
We're not sure "vague sense of unease" quite covers it. People are rushing to buy safes to hoard their money in because the head of the central bank has lost his mind...
April 9th, 2016 at 9:28:29 PM permalink
petroglyph
Member since: Aug 3, 2014
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This was a very good explanation for neg. rates and eliminating cash, from over at the hedge. http://independenttrader.org/war-on-cash-a-piece-of-a-bigger-puzzle.html
Everyone gets thrown from the plane to maintain altitude
April 10th, 2016 at 5:17:05 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 110
Posts: 8660
Quote: petroglyph
This was a very good explanation for neg. rates and eliminating cash, from over at the hedge.


Great article. More summarized and confirmed my beliefs than new material for me, but will make it easier for me to explain to those who will listen. Mr and Mrs America do not have any idea what is about to hit them yet it is so clear as to be beyond belief.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
April 10th, 2016 at 7:55:03 AM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 851
Posts: 10166
Quote: petroglyph
This was a very good explanation for neg. rates and eliminating cash, from over at the hedge. http://independenttrader.org/war-on-cash-a-piece-of-a-bigger-puzzle.html


Quote: War on Cash – a Piece of a bigger Puzzle?
For over a decade the World has experienced a peculiar kind of war – the war on cash. According to governmental propaganda, the noble reason behind it is the fight against money laundering and financing terrorism. Meanwhile, the involvement of the HSBC in the biggest money laundering for Mexican drug cartels scandal was swept under the rug. The bank never formally admitted anything. It had to pay a penalty but the fact is that no employee faced charges, not to mention any jail time.Knowing the above, can you actually believe in the war on cash being waged against criminals? No. You simply cannot.


I thought that quote from the beginning of your article was good. Part of my skepticism is that a major article was presented in 1976 (only 7 years after the government decided to destroy as many of the $500, $1000, $5000 and $10000 US banknotes that they could and not print any more). The author was responding to the tens of billions in $100 bills printed during the Nixon-Ford presidency. He suggested that the government start a currency reform and eliminate the $100 banknote and possibly the $50. The motivation was to combat criminal activity. Now it is four decades later and the idea is getting more traction. the goal is still stated to be to aid in eliminating money laundering, but why was that goal ignored for so long?

The answer is simple. Although the government has always been concerned about people who don't use their money, those fears are greatly increased today with negative interest rates. The thought of regular people, and not just criminals, hoarding their money in cash in a safe under their bed, frightens the government. So they use the argument that high denomination banknotes aid criminal activity. But if you read the article, that argument against high denomination banknotes has been public for forty years.


Quote: Calling in the Big Bills by James Henry
-The Washington Monthly, May 1976, pp. 26-33
A monetary detective finds a painless way to catch the tax evaders and cripple organized crime
James Henry is a Danforth Fellow in economics and law at Harvard University.

Of the new bills issued in exchange for the old $50~ and $1OOS, most would be $10~ and $20~. Now, before the reader dismisses this proposal as harebrained, let him or her consider the following points. First, this scheme would not be entirely unprecedented. Successful currency reforms were undertaken in West Germany in 1948, France in 1959, China in 1956, and the Soviet Union in 1947 and 1961. The United States itself organized several currency recalls in South Vietnam, during our visit there.


Whose picture is on a $100 bill? Have you ever had a $100 bill in your wallet? How often have you even seen a $100 bill? Or a $500, or a $1 OOO? Of the roughly $80 billion in paper currency now outstanding in the United States, over $21 billion is in $100 bills. This means that there is one $100 bill for every man, woman, and child in the country. In addition, there is close to $8 billion in $50 bills,and almost half-a-billion dollars in currency denominations above $100. All told, denominations of $50 or more account for over 40 per cent of the domestic currency. The ordinary ones, fives, and tens to which most of us are accustomed represent only about one quarter of the paper money supply.
This would not seem so odd if consumer credit, the checking account, and price inflation were less important aspects of the American economy. But approximately 90 percent of consumer and business transactions are handled by checks drawn against demand deposits (checking accounts). Only small retail purchases are routinely made with cash. Furthermore, with price indices rising at annual rates in excess of six per cent, cash, a non-interest-bearing asset, is the worst store of wealth imaginable.
The historical evidence is even more perplexing. You might expect that increased urbanization, the rise of real incomes, the invention of credit cards, and the automatic withholding of taxes, union dues, and pension and medical fees would have reduced the demand for cash. Initially this reduction did take place. At the end of the Civil War, there was about $80 in currency in the United States for each $100 of demand deposits. By 1929 this ratio had declined to $15 per $100. But then the ratio began to rise. By 1958 it had reached $25 per $100, and by 1974, $31.32 per $100, close to its 1895 level. The real value of currency per capita in the United States has risen from $78.64 in 1929 to $248.38 in 1975, while the real value per capita of denominations of $50 or more has risen from $20.55 to $90.47. In other words, even eliminating inflation, the average American has almost five times as much money in large bills as he or she did 46 years ago.
Of course the average American carries around no large bills at all. Where is all this cash? Unfortunately there has been no census of currency holdings in the United States since 1933. As the detectives assigned to this case, therefore, we are left to our own devices. At first we might guess that a lot of the currency is held by the domestic banking system, non-financial domestic enterprises, or foreigners. But this turns out to be false.
Commercial banks are required by the Federal Reserve to maintain a certain percentage of their assets in liquid form, and cash in the vault is sometimes used for this purpose. But banks try to minimize cash holdings in order to hold interest-bearing assets. At present the total amount of currency held by the U. s. Treasury, Federal Reserve member banks, and the rest of the financial system is only about one fifth of the currency in existence and less than five per cent of the paper denominations over $50. This still leaves well over $60 billion unaccounted for, $30 billion of it in the large denominations.
Foreign holdings of U.S. currency reached a peak in the years immediately following World War 11, when the dollar was quite strong relative to other currencies. Even then, the maximum estimate of these holdings was $4 billion, or less than 20 per cent of the currency then available. The subsequent weakening of the dollar, culminating in the 1971 devaluation, has no doubt reduced this fraction to under ten per cent.
The amount of currency held by non-financial businesses at any one time is somewhat more difficult to 28 I estimate. But it is clear that a general rise in the level of interest rates since 1945, wider availability of short-term bonds and notes, and the expansion of corporate credit have all increased the velocity of business funds. The faster money is circulating, the less is needed to conduct a given volume of business. In 1948, the Federal Reserve estimated that of the $25.4 billion of currency then in circulation, only $4.8 billion was held by business. Ignoring all the factors which suggest a decrease in legitimate business’s need for cash, an outside estimate of the currency now held by non-financial domestic enterprise still is only about $12 billion. Most of this probably is in smaller denominations or coin.
So, even allowing liberally for all the obvious users of currency, we still have at least $40 billion, including most of the large denominations, to account for. The mystery is, who is making use of these bills?

A Hypothesis

There are only two kinds of activity in the U. S. which depend almost exclusively upon large, untraceable, non-credit transactions. The first is profit-motivated crime : illegal gambling, drugs, prostitution, loan sharking, protection, the fencing of stolen merchandise, etc. The second is tax evasion by people who arrange to receive cash incomeand don’t report it. It also happens that both of these activities have experienced growth which coincides with the turnaround in currency demand since the 1930s.

(Actually, a third kind of activity which depends heavily upon cash is the illicit receipt of wage income by people who also collect payments from government programs such as welfare or unemployment insurance. This would probably be much less dependent upon the use of large denominations, however.)

These activities have two things in common. First, they depend on cash. In the case of tax evasion, this is simply to avoid bank records which might prove legally embarrassing, and also to avoid paying spouses. In the case of organized crime, cash is also useful because it gets around the problem of lack of trust and inherent lack of legal recourse between the interested parties.
Secondly, both activities have a special need for large denominations. Using cash in large transactions where any legitimate businessman would write a check, organized criminals would be sorely inconvenienced if they had to slip a couple thousand bucks to a judge in the form of $5 and $10 bills. Tax evaders simply find it much easier to hide and store large bills. Using large bills, a lot of money can be stored in a very small area, as the following story from The Wall Street Journal indicates:
“Tax investigators recently closed in on a Dallas area dentist who stashed $20,000 of unreported income in a coffee can. He arrived home one day to discover his wife had thrown the can into the trash. After finding that neighborhood trash had already been collected, he hired a bulldozer for $5,000 and carefully sifted the city dump. By the time the frantic dentist finally located the coffee can, the whole town-as well as interested government agents-knew about its contents.
What I am suggesting is that these forms of illegal activity can explain the demand for the “missing bills.” The evidence as to the size of these activities supports this logical assumption. Of course, there are no exact estimates. But the best evidence which I have been able to gather suggests that, considered together, these forms of crime almost certainly yield more net income to their participants than the top ten U. S. corporations earn each year in profits before taxes.

Tax Evasion

Our most definite information is on the extent of tax evasion. One way to establish an upper limit is to The Washington Monthly/May 1976 compare the adjusted gross income (AGI) for the U. S. economy that is estimated each year by the Department of Commerce, with the AGI actually reported on tax returns. In recent years, about 92 per cent of the estimated AGI has been reported. In 1975 the difference amounted to about $75 billion. To determine how much of this is tax evasion, we must subtract income which is earned by individuals who are below the filing requirement level. But in 1975 this unreportable income only amounted to between $6 and $8 billion. So unreported taxable income, computed in this manner, might be as much as $67 to $69 billion.
This “residual method” of estimating income tax evasion is subject to measurement errors at each step of the analysis. It also doesn’t tell us directly how much actual currency is required to support this volume of “business.” Using econometric techniques (details available upon request), I have estimated that the total value of large-denomination bills ($50 and greater) held for the purpose of tax evasion in 1973 was somewhere between $7.9 billion and $15.7 billion, with the most likely figure being $11.8 billion.
This stock of money being held for tax evasion suggests in turn a total volume of tax evasion in the year, which depends on the velocity with which this money circulates. In recent years the velocity of money in ordinary transactions has been five (meaning that the average dollar gets transferred five times in the course of the year). The velocity of the average tax evasion dollar almost certainly is much lower than this, since tax evaders put away their bills in coffee cans rather than spend them, to avoid the watchful eye of the IRS. A reasonable figure for the amount of tax evasion using bills of $50 and higher might be $30 billion a year-not $69 billion, but still quite a lot.
It is interesting to speculate about who actually receives this income. Since almost all members of the salaried labor force are subject to cheatproof withholding taxes, most of it probably goes either to self-employed professionals (doctors, lawyers, and independent contractors, for example), proprietors, or casual laborers (night-club performers, cabdrivers, and waitresses). Here, “however, we have been concerned with the use of large denominations to evade taxes. The main recipients of this kind of unreported income are probably the self-employed professionals and proprietors, individuals who would have had above-average income even in the absence of tax evasions. This suggests that actual income distribution might be even more unequal than what is reported. For example, the total pret ax income --including government transfer payments-for the 23 million people with incomes below the poverty line in 1973 was only $18.5 billion. Assuming that those who received the unreported income that year would have been subject to a 30-percent effective tax rate, the loss in federal revenues due to tax evasion amounted to nearly one half of the total money income of the poor.

Organized Crime

We have already accounted for perhaps one third to one half of the demand for the “missing” large denominations. Organized crime accounts for another sizeable fraction. Here, however, there are no income accounting or econornetric methods to lend a hand. The volume of criminal transactions is not treated as part of the CNP, even though illegal income is taxable if the IRS learns of it. In the absence of hard facts, this volume has been a popular subject of conjecture, not unlike the size of the Loch Ness monster. Meyer Lansky was once quoted as saying, “We are bigger than U. S. Steel.” In the early 1950s the Kefauver committee arrived at a figure of $20 billion per year for the annual volume of illegal gambling alone. In 1967, the President’s Commission on Law Enforcement estimated the annual profit of organized crime at roughly $7 billion, compared with the $7.2 billion in net profit earned by the top ten U. S. corporations in 1968. It also claimed that illegal gambling proceeds in that year ran as high as $50 billion, that loan sharking was a “mul ti-billion dollar” enterprise, and that narcotics traffic was upwards of $350 million. More recently, drug enforcement officials in New York City calculated that the illegal heroin and cocaine business there was worth between $2.5 and $3 billion per year, and employed 20,000 people.
The problem with such estimates is that they usually come from law enforcement officials, or from politicians. Both have a potential interest in exaggerating the proportions of criminal activity. (One possible explanation for the renewed attention given the New York heroin traffic during the last few weeks of 1975, for example, was the threat of layoffs in drug enforcement agencies.) But some support for these large estimates comes from other available information. We do know that the current volume of legal gambling each year is at least $5 billion. The establishment of state lotteries in the major industrial states does not appear to have reduced the demand for illegal gambling, since state lotteries do not permit or daily numbers games.
The volume of illegal gambling must be at least as large, and perhaps larger. We do know that the current street price of heroin is about $20 per bag, and that an addict will shoot up between one and five tinies a day, depending upon the supply, consuming one or more bags each time. There are no reliable estimates of the number of heroin addicts in the U. S., but it is clear that the number has increased dramatically since 1966, when the Bureau of Narcotics claimed that there were exactly 59,720. Several local studies around the country support this conclusion. Assuming, conservatively, that there are only 200,000 addicts in the U.S., who consume an average of only one bag per day, the total volume of heroin traffic would be about $1.5 billion this year. Of course this is only a fraction of the total illegal drug trade.
We do know that nearly one million automobiles are stolen each year in the U.S., and that only about half of these are ever recovered. If most of those which are unrecovered are stolen by if these professionals specialize in the theft of latemodel autos, and if these were resold to dealers at only 25 per cent of their market values, then illegal traffic in stolen autos might bring in nearly $500 million each year. Technically, this is a transfer payment, not an item which belongs in the other profit-motivated, cash demanding crimes are more difficult to handle precisely. By far the most important of these is loan sharking, which might easily be almost as large as the annual level of illegal gambling. But the composite volume of prostitution, extortion, bribery, truck hijacking, cigarette smuggling, securities theft, pension graft, counterfeiting, and union racketeering might well be equally important. We are admittedly on extremely thin evidentiary ice, but all told, a $30-billion figure for the present annual volume of profit-motivated crime in the United States does not appear to be unreasonable. Assuming a reasonable velocity for the cash required to meet this annual volume, it is likely that between $5 and $10 billion, mostly in large denominations, is held at any given time by participants in criminal enterprise.
When added to the estimate for tax evasion hoarding, these figures suggest that well over half of the $50, $100, $1,000 and higher-denomination bills are held for illegal purposes.

Calling All Cash

The implication of all this detective work is clear: currency reform. The U. S. Treasury and the Federal Reserve should call in all large denominations on very short notice and exchange them for new bills. All exchanges would be conducted through banks; it would be a punishable offense to sell large denominations at a discount to other private individuals so that they might exchange them in smaller bundles. All exchanges at banks would take place under the watchful eye of the IRS, especially those in large amounts. Of the new bills issued in exchange for the old $50~ and $1OOS, most would be $10~ and $20~. Now, before the reader dismisses this proposal as harebrained, let him or her consider the following points. First, this scheme would not be entirely unprecedented. Successful currency reforms were undertaken in West Germany in 1948, France in 1959, China in 1956, and the Soviet Union in 1947 and 1961. The United States itself organized several currency recalls in South Vietnam, during our visit there.
The procedures followed were much the same as those which are suggested here, and those procedures worked very well, without chaos or financial panic. A currency reform aimed soley at large denominations would be much easier than a general currency reform, since the concentration of ownership of large denominations is so high.
Secondly, the economic costs of this scheme would be trivial in comparison with its benefits. The chief direct costs would involve the replacement of old bills with new bills and the administration of IRS inquiries. Of course, an unknown proportion of the old bills would not be turned in because of the owners is produced.
A less obvious cost of this scheme arises from the fact that carrying cash amounts to an interest-free loan to the government. A dollar bill is really like a government bond that pays no interest. By reducing the usefulness of cash for criminal purposes, the government will decrease the demand for it. To maintain the size of the total money supply, the government will have to issue interest-bearing securities. Whatever this cost might be, the government clearly should be willing to give up this share of the it earns through currency policies which facilitate criminal activity.

The Effect

The immediate effect of this scheme would be to strike a sharp blow at tax evaders, dope dealers, racketeers, purveyors of vice, and corrupt officials. These denizens of the criminal deep would have to surface wit11 the large cash balances which they carry on hand, and the tax authorities could begin to ask questions.
Naturally, many criminals would search hard for ways to escape these consequences. Unless the reform was carefully implemented they might, for example, convert large bundles by selling them piecemeal at a discount. (Participating in such discounting might be made a criminal offense. In any case this discounting would have an equalizing effect on the income distribution.) Or they might run from bank to bank, cashing in small amounts at each one. (Old bills might be redeemable only at a bank in the city where one is register to vote, with cross-checking between banks in each city.) Or they might refuse to answer IRS questions about the source of the cash, asserting the Fifth Amendment privilege against self-incrimination. (Large amounts of cash which surfaced without explanation would nevertheless provide very useful investigative leads.) In general, these escape routes would not be difficult to check, assuming that the reform were introduced with the appropriate degree of surprise and cunning. In the longer run, cutting down on large denominations in circulation would increase the transaction costs of illegal activity (by, for example, reducing the amount of money that can be contained in any given suitcase). The liquidity crisis which would ensue for tax evaders and other criminals might to some extent be averted by the substitution of other currencies, or other exchange mediums such as precious metals. But these are much less convenient, especially for consumer-oriented criminal enterprise. In any case the substitution would be expensive and time-consuming.

No Cash Lobby

There are only three objections to this proposal which deserve to be taken seriously. The first is that it would require an unparalleled degree of secrecy. Without it currency hoarders might be able to convert their bundles in advance. But currency reform would require no more secrecy than that which accompanied the 197 1 dollar devaluation. Even if a few criminals with “inside information” were tipped off, the average tax evader would be taken by surprise. And even without secrecy, the long-run benefits from reducing the number of large bills would be achieved.
The second objection is that these measures would be politically unacceptable to the American people, some of whom might consider them an intolerable invasion of “rights.” An analogy might be drawn between this plan and gun control. However, under closer analysis it appears that “cash control” would succeed politically precisely for the reasons that gun control fails. Unlike the distribution of guns, the distribution of large denominations is almost unbelievably concentrated; if anyone doubts this, ask your friends, local storeowners, and bank tellers how often they handle $100 bills.

The Eccentric Farmer

The final objection is that these measures would create serious hardship in individual cases. For example, what about the eccentric old farmer who arrives in town for his once-ayear fling, only to find that the $100 bills he has been saving are worthless because they had been called in six months before? Unluckily he lives alone and doesn’t read the newspapers or watch television. What would become of his secret fortune? Well, we can easily imagine a rule which would allow such eccentrics to exchange their bills late upon a showing that they had no reasonable access to notice of the reform and that their wealth was already taxed. But obstinacy alone would not suffice.
This nation spends about $15 billion a year on police, prisons, and courts. We know from bitter experience that there is no simple relation between more dollars and less crime. Most of this $15 billion, by far, is spent on attempts to reduce street crime. Comparatively little attention is paid to white-collar crime, whose economic effects, at least, are far more serious. Currency reform would be a simple, inexpensive way to identify white-collar criminals, and to make their continued operation more difficult.